It’s an all-too-familiar and sad story: the couple who enters retirement thinking they have enough, but find themselves scraping by from month to month. You may remember how uncomfortable it was to live paycheck-to-paycheck when you were younger. Do you want to live that way again when you’re in your 70s and 80s? Of course not! You don’t have to be a millionaire or some kind of genius investor to set yourself up well for retirement, either. You have to understand the fundamentals or pillars of retirement planning—and stick to them! If you follow these four essential pillars of retirement planning, you’ll find that you can build a retirement “house” that will last you the rest of your days.
Retirement Planning 101
Pillar 1: Income
The first pillar you need to establish seems the simplest but can be tricky if you don’t think about it correctly. You need to sit down and figure out how much income you need to live on. Make sure you include regular contributions to an emergency savings account. Your social security and/or pension will likely cover a good amount of your monthly needs, but probably not all. That’s where setting up a steady stream of income from investments and other services ahead of time pays off. Don’t forget to set a robust budget that covers not just monthly needs but also looks ahead to the future and regularly contributes to at least one savings account. Finally, have a friend with a good financial head on their shoulders check your budget for you, looking for anything you’ve overlooked, and making sure that you’re projected to be in good shape financially for at least twenty years.
Pillar 2: Liquidity
This is the real tiger pit hidden on the jungle path for retirees. You’re cruising along just fine, and you get hit with something unexpected. Suddenly, you find yourself needing to pull out several thousand dollars, but most of your money is tied up in investments. Before you put the bulk of your nest egg in long-term investments that will penalize you for early withdrawals, set aside some for emergency expenses that might occur during the first twelve to eighteen months of your retirement. By then, your income from the other investments will be coming in steadily enough that you can set some of that aside for emergencies, too, so your emergency cache doesn’t get depleted. The bottom line here is to always make sure you have a good stockpile of assets that can be quickly liquidated when there is a need, especially in the early days and months of retirement.
Pillar 3: Security
Financial security is another bedrock consideration of retirement planning. We’re not talking about whether your accounts can be hacked (though that’s important, too) but whether your investments are secure from economic fluctuation. Talk to your financial advisor about how best to diversify your retirement portfolio, so you’re not too invested in any one type of fund. That way, if anything happens to the market in the short run, you won’t see your nest egg reduced drastically. One approach could be to divide your investments out into ultra-short-term bonds and money markets, short-term bonds and annuities. The maturity dates of each of these investments occur at different times and offer different benefits. They also have varying reactions to the ups and downs of the economy and stock market. Of course, you should make sure you discuss all this with your financial advisor. The overall concept you’re going for is not to put all your eggs in one basket.
Pillar 4: Growth
You’re probably not a younger investor with many years ahead of you to play the market. You likely don’t have the margin to both gain and lose money through investing over time, either. However, if you play it smart and understand what you’re doing, you can still be invested in growth vehicles, even after retirement. And now that retirements routinely last 20 years or more, you should consider investing in growth, anyway. Growth is the pillar that will help shore up the others as you age into your retirement, especially if something unexpected were to happen, such as a large expense, or a loss in a major investment. You don’t want to get too aggressive with investing in growth funds; your bottom line is to stay ahead of inflation, and if you do better than that, well, that’s gravy. As always, investment strategies like this are something you should definitely discuss with your financial advisor.
Retirement isn’t what it used to be. Gone are the days when you might retire quietly on a pension or even on a nest egg that gets slowly whittled down over a few years. For most retirees in reasonably good health, they can expect retirement to last another quarter of a century, and to be active much of that time. This change of circumstances for many retirees requires a different strategy than what has been the norm in the past. Future retirees need to plan ahead as far as possible to reap maximum benefits from long-term investments. Today’s retirees also have options for shorter term investments, though the returns are not as large and some investments may be riskier. Regardless of whether you’re retiring now or ten to twenty years in the future, you need to plan ahead and invest wisely. However, if you plan well ahead of time and set up the four pillars correctly, you’ll be able to enjoy your retirement without having to always worry about scraping by from month to month. Find yourself a good financial advisor and get started. The future of retirement is bright for those properly prepared for it!